Given the remarkable jury verdicts that often arise in trials between companies and their employees, and given the fact that almost all juries have more employees than employers on them, most businesses in California would prefer to arbitrate their disputes with employees and past employees if at all possible. (See Web Article on Arbitration.)

Historically the California courts have been reluctant to enforce mandatory arbitration agreements in the employment setting. The employment context has been one of the few exceptions to the otherwise generally stated policy of the courts to give every presumption of validity to arbitration agreements. However, since the courts have presumed that most employees are in a weak position to bargain with prospective employees, the courts have been unwilling to enforce arbitration agreements in which the employee is required to waive substantial rights as a condition of employment. Such "substantial rights" have been held to include the right to a full jury trial in a court of law.

The California Supreme Court in the recent decision of Armendariz v. Foundation Health Psychcare Servs., Inc. , for the first time offers practical guidance to California employers who wish to draft enforceable agreements for the arbitration of employment disputes.

The Armendariz Court laid out the minimum requirements for compelling arbitration of employment discrimination claims under the California Fair Employment and Housing Act (FEHA).

1. Neutral Arbitrator. The dispute must be submitted to a neutral arbitrator. The agreement may not, for instance, require that the dispute be submitted to an official of the employer’s company for decision. An agreement which requires the dispute to be submitted to

a professional alternative dispute provider, such as the American Arbitration Association should satisfy this requirement.

2. Provide for Adequate Discovery. The employee must be given access to discovery tools, such as the right to obtain relevant company documents and the right to examine under oath before the hearing all relevant witnesses such as deposing company personnel

who have knowledge relating to the dispute. The court implied that incorporating the California Arbitration Act discovery provisions in the agreement would suffice.

3. Allow the employee all FEHA Remedies . The arbitration agreement cannot limit the damages otherwise recoverable under FEHA, including back pay, front pay, general damages, punitive damages, reinstatement and attorneys fees.

4. Written Award by the Arbitrator. The agreement must require the award of the Arbitrator be in writing.

5. Employer Pays Fees and Costs of Arbitration Because some argue that arbitration can be more costly for a complainant than a lawsuit in court, the employer must bear the costs and fees unique to arbitration. (This does NOT include attorneys’ fees, but would presumably include administrative fees of the arbitration association, such as fees to the arbitrator. These normally run between two and ten thousand dollars in a typical dispute.)

In addition to these specific requirements, an agreement for the mandatory arbitration of employment disputes must comply with general principles of conscionability, that is the agreement cannot be so unfair or one-sided that it "shocks the conscience." Although, the court did not provide a clear test for unconsionability, it did provide some useful guidance for employers. The first step is to determine whether the agreement is an "adhesion Agreement," that is an agreement imposed by the party with superior bargaining power on a take it or leave it basis. A fully negotiated agreement with an executive employee would likely not be regarded as an adhesion contract whereas a standardized agreement with rank and file employees would possibly be viewed as an adhesion contract.

With regard to adhesion type contracts, the court did not offer much in the way of guidelines other that to state that such contracts must contain "a modicum of bilaterality." The only thing clear from the Armendariz decision is that an agreement which requires the employee to arbitrate any dispute with the employer, but allows the employer to pursue a dispute with the employee in court lacks the necessary bilaterality.

The conscionability test will no doubt be fleshed out by future court decisions which will be followed by our office.


This office normally recommends arbitration in most business contexts. Our courts are expensive, the results often uncertain, the forum public, and the time consumed significant. Most cases, even when given a trial date, do not necessarily go to trial on the day listed since other cases do not finish on time, thus the parties and all their witnesses wait about the court room, often returning day after day, hoping for a court room. The cost of such delay can be tremendous. Arbitration is a private forum in which the date is selected by the parties and such delays are unlikely.

However, before deciding to implement binding arbitration agreements with its employees, the employer should carefully consider the advantages and disadvantages of doing so. The advantages of arbitration to the employer are that resolution is obtained much more quickly, at relatively less cost, in a less public forum and the employer avoids the risk of the runaway jury verdicts one has perhaps seen in the newspapers. The potential disadvantages are the lack of a summary disposition process which means that even cases without a shred of evidence for the other side must still proceed to a full arbitration of a claim which may be legally merit less on its face as well as the lack of a meaningful right of appeal. The basis on which an arbitration award may be reviewed are very limited.

Experienced legal counsel should be consulted before any such procedure or contract is created.